Filing Taxes as a Freelancer: 10 Mistakes to Avoid

Tax time is no fun for anyone, but it’s particularly harrowing for freelancers and other small business owners. Sure, we get more deductions for our business-related expenses. But we also have to keep much better records, do more paperwork, and be a bit more worried about a potential IRS audit.

The absolute best way to avoid an IRS audit (or to survive one if you do get audited) is to be honest. If you keep good records and report your income and expenses properly, you have nothing to worry about!

But just in case, check your tax return for these 10 IRS red flags:

1. Simple mistakes

Typically, the IRS penalties are more lenient if you make a simple mistake – like writing an 8 instead of a 3, or making a small mathematical error. Still, you want to do everything possible to avoid even being red flagged. So be sure that you check and double-check every entry in your tax forms for a mistake before you file.

2. Failure to report income

The IRS is good at sniffing out extra income that you didn’t report. So even if you didn’t get 1099-MISC forms from clients – either because they’re slacking or because they paid you less than $600 in the calendar year – you still need to report that income.

3. Filing a loss

Filing a loss is normal – even expected – in your first year or two of business. But after that, you need to be cautious about filing a loss, especially as a sole proprietor filing Schedule C. The IRS will grow suspicious if your business expenses seriously outweigh your income, or if you file a loss several years running.

4. Taking the wrong business deductions

The IRS requires that business-related tax deductions be “ordinary and necessary.” Whenever you claim a business expense, ask yourself: “Is this something that was 100% business-related? Is it something others in my field are likely to claim as an expense, too?” If the answer isn’t a resounding “yes,” don’t take that deduction.

5. Too-neat numbers

Most of your deductions won’t be in nice, neat, round numbers. Too many round numbers on your tax return, and the IRS will likely accuse you of guesstimating. Take time to add up the actual numbers from your receipts and you’ll protect yourself from suspicion.

6. Using the home office deduction

The home office deduction is a common red flag because many people do abuse it. So even if your home office meets the IRS requirements, you may want to skip this deduction. However, if you play by the rules and will save lots of money with this deduction, take it. As long as your return doesn’t include other major red flags, you’ll likely be just fine.

7. Overstating business entertainment costs

Way too many sleazy business people use business entertainment costs to their advantage. You can and should deduct costs related to business travel or taking a client out for coffee. Just don’t take advantage of this deduction with five-star hotel stays and gourmet meals.

8. Independent contractor deductions

Many freelancers hire other freelancers to help with marketing, administration and other tasks. And we can claim as a business expense the money paid to independent contractors. However, you need to be absolutely sure that your contractor is actually a self-employed independent contractor, not an employee.This IRS page will help you decide.

9. Business deductions if you have other income

Operating as a freelancer while working another job is typical. But be careful about claiming huge business deductions for your freelancing gig while you have a regular full-time income. And you definitely don’t want to file a loss on your Schedule C if you have a full-time income!

10. A very low income

Individuals with a low enough income to claim the Earned Income Tax Credit are some of the most likely to be audited. Because the EITC is often leveraged by fraudsters, it can be a big IRS red flag. If you do qualify for the EITC, take it. But be sure you have all your ducks in a row – just in case!

If you’re afraid of filing your taxes because of all these potential red flags, don’t be. Only about two percent of Americans are audited each year, and most of them have committed serious tax errors or are clearly trying to claim excessive, irrelevant deductions.

As long as you keep good records, take only deductions for which you legitimately qualify, and are careful not to make a mistake, you’ll be good to go.

What do you watch out for when filing your taxes as a freelancer or small-business owner?

Note: Neither Abby nor The Write Life are tax professionals, and this post does not constitute tax advice. For specific advice, please see a tax professional.

16 comments

Lots of good points, Abby, thank you! I’ve been filing as an independent contractor since I was 18, and it still scares the pants off me. I keep thinking that at some point I’ll get used to it… maybe this year?

Interesting article. I live in Canada and still find many of your suggestions beneficial. I have business for self income from farming offset my employment income in poor sales years so I can appreciate the element of not claiming too many consecutive losses. Ultimately it’s better to make enough money and pay taxes than to loose enough that you get taxes back. Another benefit to showing a higher earned income is highlighted when you borrow money. An income shows an ability to pay back debt.

I’m a dual Canadian-US citizen, and I’d add a reminder that American citizens living outside the US always have to file with the IRS, regardless of whether or not you had US-source income in that year. (Taxes paid or accrued in your country of residence are deducted from taxes owing in the US, so you don’t pay twice.) If you travel to the US to meet with clients, it becomes even more complicated; you’ll be taxed by the IRS for income you earned on the days you were in the US – and then those are deducted from taxes owing in your country of residence. A knowledgable cross-border accountant is well worth the investment, if it’s at all possible – and their services are 100% deductible.

Thank you for sharing this advice on filing taxes! As the owner of my own company, it is really important that my taxes look very clean. It would be awful if I ended up getting reported for tax fraud just because I rounded the numbers on my tax return. I’ll be sure to keep these in mind when I start filing. If things get too hard, though, I’m definitely finding a professional.